Our Analysis of International Business Machines Corp (IBM)

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Every Tuesday at HX Daily, we analyze one of the US stock market's biggest and most widely owned companies.

We analyze these companies using our “Quantamental” approach.

We have developed this analysis process over the last three decades, and it is a quick way to analyze the stock's potential.

As a quick reminder, our "Quantamental" analysis is not a formal stock recommendation but a quick analytical analysis tool to give an initial view of the stock in the short and intermediate term.

Last year (2024), we reviewed a total of sixteen stocks. These were either some of the largest and most well-owned stocks (all the members of the "Magnificent Seven") or companies that were in the news, like The Boeing Company (NYSE: BA) or NIKE, Inc. (NYSE: NKE).

Today, we will continue with another company recently in the news and one of the oldest and most famous technology companies of all time – International Business Machines Corporation (NYSE: IBM).

This Armonk, NY-based technology giant was founded in 1911 as the Computing-Tabulating-Recording Company (CTR) and specialized in record-keeping and measuring systems. It was renamed "International Business Machines" in 1924 and became a leader in the manufacturing of punch-card tabulating systems.

Eventually, they evolved this business into the first mainframe computer platform and became the world leader in this area for several decades. With the introduction of the “personal computer” in the early 1980s, they also took an early leading position in that industry.

Today, the company has a diversified technology business focused on computer services, software, supercomputers, and scientific research. Given their long history of innovation, they are one of the largest holders of intellectual property patents and rights on Earth.

Here is the analysis…

1) TECHNICAL ANALYSIS

IBM has been publicly traded for a very long time. It was one of the leading stocks in the market for decades and essentially the NVIDIA Corporation (NASDAQ: NVDA) of the "Nifty Fifty" BULL market of the early 1970s.

However, the stock has not done much in recent decades.

Here is the chart of the stock over the last decade…

The stock had done nothing up until just the last few months. In fact, the stock was down as much -40% from 2014 until early 2021.

This is a different path than we have seen with many of the other companies we have analyzed.

It also has a much smaller market capitalization than most of them, although it is bigger than both BA and NKE.

Since bottoming out at a little more than $160 per share less than a year ago (below the 2014 level!), the stock has increased steadily over the last ten months.

Here is a chart over the last year along with the relative strength index or “RSI” …

Looking back beyond the last year, the stock has been steadily rising from those multi-year lows.

At the end of the chart, you can see that the stock recently stepped higher on the back of a good earnings report.

We think that the well-established uptrend in the shares over the last two years bodes well for the future of the stock. It has been in a relatively low volatility, smooth upward trend that we like to see in a stock price.

The big move last week, though, pushed the stock's RSI to an unprecedented level. In fact, we went back over a decade, and the stock had not traded at this level (over 80) during that entire period.

We decided to look at how the stock has performed after it has breached the (slightly lower) 75 level.

Here is a table showing how the stock has performed in the weeks and months after going through this level of RSI...

This has not been a great level to buy the stock.

It doesn’t go down a lot on average – and the maximum loss was less than -20% - but it is a very low probability bet. Making money less than one-third of the time in the short term.

We like the fact that the stock has been a clear "winner" recently. It has strong investor support and attention.

However, we do not like buying at these levels from a short-term tactical perspective. The average returns are poor, and we don’t like buying when, historically, you have lost money two-thirds of the time.

TECHNICAL ANALYSIS = AVOID

2) EARNINGS REVISIONS

Our readers know that we think that the strongest driver of near-term stock price performance is whether companies beat numbers and see positive earnings revisions.

We refer to them as “earnings” revisions, but they can also be revenue revisions. We usually look at not only the most popular measure - earnings Per Share (EPS)but also other measures, such as Earnings Before Interest, Depreciation, and Amortization (EBITDA).

Like most well-established companies, the EPS numbers are the most widely followed at IBM.

Here is a chart of the stock price versus the fiscal year 2025 EPS estimates for the company…

The numbers have been relatively steady but have not moved a lot. They appear to have shifted somewhat higher over the last few years.

This timing matches up well with the movement in the stock. As with most stocks, the stock has followed when the earnings estimates have gone up.

Despite little movement in the earnings revisions, the company also has a decent track record of beating earnings expectations. This table shows how their actual reported numbers compared to the analyst estimates for the last five years…

Again, this is a decent track record. IBM has beaten estimates for the last ten quarters; some of the more significant results have come more recently.

Note that during this more recent quarter, though, they didn’t beat the revenue estimates by nearly as much.

Why was the stock up so much then, with decent but not incredible numbers?

Excitement about artificial intelligence.

IBM was among the first companies to do significant AI research and innovation. Remember their "Watson" Supercomputer that would play chess versus human grandmasters?

Some analysts (including ourselves) think IBM is sitting on a potential mother lode of IP that could eventually be monetized in AI.

We think if the company can continue to post consistent positive revisions and surprises (even if small), this promise may continue to be recognized in the shares.

EARNINGS REVISIONS = BUY

3) EARNINGS GROWTH

The final measure we focus on is the actual growth in earnings.

While earnings revisions drive a stock higher in the short term, earnings GROWTH drives a stock higher in the long term.

In our INVESTING strategies, we are looking for companies that are going to grow EPS from $1 to $10. If you can find those stocks, you can make a LOT of money.

Here is the table for the EPS results of IBM over the last ten years…

The earnings performance better explains the great performance of the stock price.

The company is still earning well below what it earned ten years ago. In fact, they saw earnings go down for most of this period.

It has only been recently that they have seen stability and now some growth.

Relative to the other "winning" stocks, we have analyzed using our "Quantamental" approach, though these numbers are not very impressive.

Again, we think that if the company can continue to demonstrate decent momentum in terms of earnings revisions, beating numbers, and earnings growth – then the stock can do well.

The real key will eventually be if their robust intellectual property portfolio translates into material accelerated growth.

Right now, the growth is good enough.

EARNINGS GROWTH – BUY

CONCLUSION

IBM attracted our attention because of the big move-up in the stock.

Our "Quantamental" approach does not like buying overbought stocks that don't have a high probability of moving higher in the near term. Even the best stocks for the long term can have unattractive entry points.

We think IBM fits into that category.

IBM is an intriguing company. They have not had a great track record of growth for a long time, but they have shown some real operating momentum in the last few years.

They also own one of the most intriguing portfolios of intellectual property for artificial intelligence on Earth, a portfolio that could eventually have tremendous value. We think there is great potential value in the stock.

However, we don't like the entry point in the short term. On that basis, we would AVOID IBM shares for now.